Johnson & Johnson’s (JNJ) stock did not do particularly well after the company’s earnings announcement even though it beat consensus estimates. The reason for such a strange investor reaction was the fact that Johnson & Johnson paused its coronavirus vaccine trial. I would like to discuss the company’s earnings, its most recent news and the stock’s valuation.
Johnson & Johnson’s earnings
One of my Seeking Alpha colleagues argued the company’s earnings were not brilliant. The earnings estimates were already quite depressed and easy to beat. It sounds logical. However, if we compare the operational results announced on October 13 to the ones reported for the same quarter a year ago, they look quite impressive, given the coronavirus impact. The sales revenue growth rate of 1.7% is not fantastic on its own, of course. However, the company had to face many operational problems and falling demand for some of its products due to the pandemic.
Source: Johnson & Johnson’s earnings presentation, page 6
The biggest problem still seemed to be the medical devices department. However, in contrast to where the department’s results were in the second quarter of 2020, there is clearly a material improvement. In the second quarter of 2020, the operational sales in the department declined by 25% in many countries and regions. The US decline even totaled 40%. This was mainly due to the lockdown since many patients were unable to visit hospitals to undergo certain medical procedures. In the third quarter, the demand for medical devices did not reach pre-pandemic levels either. However, the results clearly showed signs of improvement. For example, in China, the growth rate even totaled 17%.
The pharmaceutical and consumer health sectors grew very well. It was especially true of pulmonology hypertension drugs. The demand for these rose due to the impact of the Covid-19. The disease affects people’s breathing abilities. So, pulmonology drugs are particularly relevant in this situation. Overall, it seems to be clear that the pharmaceutical and consumer health divisions helped to offset losses from the medical devices department.
The management is also quite optimistic about the recovery prospects. According to the earnings presentation, Johnson & Johnson expects the medical devices sales to fully recover in the 4th quarter of 2020.
Source: Earnings presentation, Johnson & Johnson, page 12
Indeed, there is a risk they would not recover in the 4th quarter. After all, we are facing another coronavirus infection wave. The situation is particularly complicated in Europe. For example, in Germany, daily cases spike above 5,000. So, there might be some operational disruptions and another fall in demand for medical devices. However, the governments still seem to be reluctant to force us all into another lockdown that we had this spring. If the coronavirus situation does not get much worse, the management’s forecasts are likely to turn out to be true.
Johnson & Johnson’s coronavirus vaccine
The main reason for the fall of Johnson & Johnson’s stock price was the recent vaccine news. The company’s vaccine trial was paused because one of the study participants got ill. This does not mean the vaccine does not have any future. In fact, there is a big difference between a study pause and a study hold with the former being temporary.
Even though the company is still likely to resume its studies, the vaccine will not increase Johnson & Johnson’s profitability. As its management announced on March 30, 2020, it will be distributed on a not-for-profit basis after the planned launch in early 2021. So, the development of the coronavirus vaccine will not have a positive impact on the company’s shareholders anyway.
Johnson & Johnson’s stock – a worthy investment?
By all means, JNJ is not a growth stock. It is a well-established company with an impeccable financial position. As we all know, it enjoys the same credit rating US Treasuries do. My Seeking Alpha colleague was absolutely right in saying Johnson & Johnson’s stock underperformed the S&P 500 over the past 10 years. But this is because of the fact that a lion’s share of the S&P 500’s capitalization is due to high-tech giants. They are high-growth companies. In fact, some experts, including Goldman Sachs’ (GS) analysts, said the last decade belonged to the likes of Microsoft (MSFT) and Apple (AAPL). They accounted for most of the stock indices’ growth. However, they tend to be overvalued compared to the so-called “value stocks.” Even if you look at the two graphs below, you will see that Johnson & Johnson’s price-to-earnings ratio of about 23 is lower than the benchmark’s average of around 35.
S&P 500 – price-to-earnings ratio history
The S&P 500’s P/E ratio is so high because of high-tech companies’ dominance.
Surely, JNJ stock is trading near its all-time highs. This is not the best idea to buy it just yet. However, it is an amazing company to buy at every dip, it seems. In my previous article on Johnson & Johnson, I recommended just this.
Certainly, buying a company, which is trading near all-time highs is not a very prudent decision to take. However, Johnson & Johnson has been operating in a very stable sector for a long time. It has a great dividend track record. Its earnings report showed clear signs of improvement. As concerns the vaccine development process, the company did not intend the coronavirus vaccine to translate into profits anyway. Although I’d rather invest in the company after a stock market crash, I am bullish on Johnson & Johnson.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.